Banks ordered to lift game on SME lending

Britain’s high street banks were today ordered to make major changes to the way they treat small and medium-sized businesses after the competition watchdog said it had serious concerns.

The Office of Fair Trading said it expected the banks to take immediate steps to remover barriers to lending for small businesses and said action would be taken if this was not done.

Vivienne Drews, chief executive of the OFT said: “SMEs are a vital driver of growth in the UK. They need access to banking services and loans which meet their needs. Our work suggests there may be competition concerns in this sector.”

The OFT will hand over its investigation to its successor body, the Competition and Markets Authority, which will also take in the Competition Commission’s role, at the end of this month.

The watchdog highlighted two areas of immediate concern.

It said it had concerns that the big banks were hindering SMEs’ access to alternative forms of financing such as peer-to-peer lending. It also questioned why banks offering loans to businesses also insisted that they take out business current accounts with them.

More broadly the OFT said its eight-month study had so far found a number of other competition concerns. These included the concentration of a handful of banks in business lending, barriers of entry to new challenger banks, and difficulty among SMEs to differentiate between different lenders. It said there was little evidence of shopping around or switching by small businesses.

Drews said: “We welcome the co-operation we have already seen from the industry and the steps that are now being taken. However, further action will follow if concerns in these areas are not addressed.”

The CMA said it would add the issue of personal accounts to the investigation into business banking and would report in the summer. A decision on a full-blown Market Investigation (equivalent to a Competition Commission investigation) will be made by the autumn.

John Longworth, director-general of the British Chambers of Commerce, said: “Without greater competition in Britain’s banking sector, far too many promising businesses will struggle to get the finance they need to grow. The announcement of a further investigation by the CMA is a welcome development — but it must deliver results.”